Health Check: How Prudently Does Renco Holdings Group (HKG:2323) Use Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Renco Holdings Group Limited (HKG:2323) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Renco Holdings Group

What Is Renco Holdings Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 Renco Holdings Group had HK$1.22b of debt, an increase on HK$1.10b, over one year. However, because it has a cash reserve of HK$101.3m, its net debt is less, at about HK$1.12b.

A Look At Renco Holdings Group's Liabilities

According to the last reported balance sheet, Renco Holdings Group had liabilities of HK$1.55b due within 12 months, and liabilities of HK$193.5m due beyond 12 months. Offsetting this, it had HK$101.3m in cash and HK$861.9m in receivables that were due within 12 months. So its liabilities total HK$779.3m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the HK$42.4m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Renco Holdings Group would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Renco Holdings Group will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Renco Holdings Group had a loss before interest and tax, and actually shrunk its revenue by 29%, to HK$328m. To be frank that doesn't bode well.

Caveat Emptor

Not only did Renco Holdings Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping HK$214m. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it lost HK$322m in the last year. So we think buying this stock is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Renco Holdings Group you should be aware of, and 2 of them don't sit too well with us.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.